TaxTMI 
TaxTMI 
2024 (9) TMI 17
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....n 30.10.2007 declaring total income of Rs. 3,21,86,520/-. In the course of assessment proceedings, the AO noticed from Form No. 3CEB that the assessee had entered into international transactions with its associated enterprises (AE), in view of which a reference to Transfer Pricing Officer (TPO) was made for determining the Arm's Length Price (ALP) of these international transaction. The international services were in respect of manufacturing segment, management support services and IT enabled support services (ITES). The TPO vide order u/s. 92CA(3) of the Act dated 21.10.2010 proposed a total TP adjustment of Rs. 6,29,55,148/- as under: S. No. International Transaction Amount (Rs.) of adjustment 1 Import of raw materials for manufacturing 4,39,53,971 2 Income from ITES segment 44,47,175 3 Payment of management charges 1,45,54,002 Total TO adjustment 6,29,55,148 3. The AO completed the assessment in conformity with the additions proposed by the TPO. A draft order u/s 143(3) r.w.s. 144C(1) of the Act was passed on 20.12.2010 and as the assessee did not file any objection before DRP, the assessment was completed u/s. 143(3) r.w.s.....
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.... contention of the appellant without providing reason for rejection of data. 4.3.3 The AO/CIT(A) erred in law and on facts in disregarding documents submitted by the appellant with regard to selection/rejection of comparable companies such as product profiles, intangible assets etc. 4.4 The AO/CIT(A) erred in law and on facts in selecting additional 8 (eight) alleged comparable companies without taking cognizance of Rule 108(2), (3) and (4) of the Rules. 5. ITES segment (Adjustment of Rs. 4,447,175) 5.1 The ld. AO erred in law and on facts, in holding that the international transaction of providing hack-office support services by the appellant to its associated enterprises is not at arm's length and making an adjustment of Rs. 4,447,175. 5.2 The ld. AO erred in law and on facts in disregarding methodical search process undertaken by the appellant and rejecting 7 (seven) out of 12 (twelve) comparable companies selected by the Appellant, without taking cognizance of Rule 108(2) of the Income Tax Rules, 1962 ('the Rules') 5.3 The ld. AO violated the principle of natural justice by not providing/sharing complete details ....
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....ary evidences submitted by the appellant to support arm's length of management fees. 6.7 The ld. AO erred in law and on facts, in arbitrarily holding that the basis of allocation of management charges adopted by the appellant is not appropriate, without providing any cogent reasons. 6.8 Without prejudice to the contentions of the appellant that no adjustment is warranted in case of the appellant, it is submitted that as the amount of Rs. 14,353,642 (excluding markup of Rs. 201,360) incurred by the associated enterprise represents share of actual cost, directly or indirectly, related to the appellant and be allowed as reimbursement of expenses by the appellant to the associated enterprise. 7. Standard deduction of 5% variation as provided u/s 92C(2) of the Act 7.1 Without prejudice to our contention that no adjustment ought to have been made in case of the Appellant, the ld. AO ought to have applied the beneficial provision regarding the arm's length range as contained within the proviso to section 92C(2) of the Act as it stood during the financial year ended 31 March 2007 and not as it stood after the amendment by the Finance Act (No.2), ....
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....urnishing of any inaccurate details, so as to warrant alteration and re-computation of ALP. The search process adopted by the assessee was not disputed, except rejection of certain comparable selected by the assessee and inclusion of some additional comparable, which had no basis. 7.2 The CIT (DR) on the other hand supported the order of the lower authorities. 7.3 We have carefully considered the rival submissions and the materials on record. Though the TPO had not explicitly pointed out any deficiency in the document prepared by the assessee, it is evident that the information or data used by the assessee in computation of ALP in its TP study report was not held as reliable or correct, which is a precondition under section 92C(3) of the Act. It is found that the primary objective of the study report prepared by the assessee was to review the transfer pricing arrangement for international transactions with its associate enterprises during the year ended on 31st March 2 007. Thus, this study report was not intended to determine the ALP of international transactions with AEs for the current year in accordance with the IT Rules. In essence, this T P study report was in the natur....
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....ssee had given it up before the Tribunal. The TPO in his order dated 03.10.2011 has comprehensively examined the authorities on this issue and rightly held that ordinarily, the revenue has to consider only the relevant assessment year's data under Rule 10B(4) and that data from earlier period may also be considered if "it reveals certain facts which have an influence on the determination of transfer prices in relation to the transaction being considered". The assessee has placed significant reliance on the OECD guidelines to contend the admissibility of previous year's data for transfer pricing determination. However, for reasons given in the paragraphs below, this Court is of the opinion that the OECD guidelines have no bearing on this issue. 7.6 It is a well settled principle that the assessee is required to perform FunctionalAsset and Risk (FAR) analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. If so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to other years. To do so, it is necessary to first establish that the facts and attendant factors have rem....
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.... which had abnormal increase in sales and had super normal profits. Similarly, the TPO had also erred in selecting companies having substantial related party transactions and disregarding the documentary evidences submitted by the assessee in this regard. It was submitted that publicly available documentary evidence submitted by the assessee in the course of proceedings before the TPO was disregarded. Further, the TPO had also erred in arbitrarily rejecting loss-making companies and cherry picking the comparable. The Ld. Counsel has painstakingly taken us through the accounts of the comparable companies contested by the assessee, the details of which were filed in multiple volumes of paper book, to drive home his point. 8.3 Per contra, Dr. Darsi Suman Ratnam, the Ld. CIT (DR), supported the stand of the TPO and the CIT(A). He submitted that the TPO was well within his jurisdiction and power to reject the comparables which were functionally not comparable. Further, there was nothing wrong in selection of other functionally comparable companies to benchmark the international transaction with the AEs. He submitted that comparability of the case is to be tested for each and every ye....
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....t 9 Coventry Coil-O-Matic (Haryana) Ltd. Assessee -0.55% -1.94% 10 Frontier Springs Ltd. Assessee 6.88% 3.93% 11 Gabriel India Ltd. Assessee 3.87% 2.64% 12 Jamna Auto Industries Limited Assessee 6.94% 6.44% Erroneous inclusions from CIT(A)'s set 13 FCC Rico Ltd. Department 14.99% 16.78% 14 Setco Automotive Ltd. Department 13.99% 14.77% 15 ANG Industries Ltd. Department 26.34% 21.46% Thus, the dispute in the manufacturing segment is in respect of exclusion of four comparable from assessee's set and in respect of inclusion of three comparable by the TPO, as upheld by the Ld. CIT(A). 8.5 It is found from Schedule 12 of the accounts of the assessee for the F.Y. 2006-07 as well as from the TP Study Report that the products manufactured by it were "Single wall Tubes / Copper coated steel Tubes, Brakes and Fuel Lines and other components". For the purpose of manufacturing the tubes and auto components, it was importing copper plated steel strips from its AEs. These components were used as brake and fuel carr....
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....ly acquired by FSL whereas in the case of assessee 50% of the raw materials were imported. When the assessee has requested for application of 'export filter' while choosing the comparable; by the same logic 'import filter' also has to be applied to the comparable. And when we consider the import filter, this company can't be considered as functionally comparable to the assessee. Hence, rejection of this company as a comparable by the TPO is upheld. 8.9 Gabriel India Ltd.(GIL): This company was manufacturing shock absorbers, struts, front forks, bimetal strips and bimetal bearings. On the other hand, the assessee was manufacturing tubular products. The raw materials utilized by GIL were tubes, bright bars, shock fluid, non-ferrous metals and steel strips. In addition components such as Pressed Parts, Die Castings, Rubber Parts, Sintered Parts and Forgings etc. were also utilized. Shock absorber is altogether different type of spring which can't be compared with the products being manufactured by the assessee. The other products manufactured by GIL are also found different from the products manufactured by the assessee as there is no similarity in the product profile. Considering ....
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....elated party disclosures appearing in the accounts, it is found that this company had the following percentage of purchases of raw materials from related parties during the Financial Year 2006-07: (i) FCC Co. Ltd. 8.25% (ii) Rico Auto India Ltd. 18.72% (iii) FCC (Philippines) Corporation 4.62% (iv) FCC (Thailand) Co. Ltd. 1.69% (v) Chengdu Yonghua FCC Clutches Co. Ltd. 0.97% (vi) FCC Europe Ltd. 2.09% (vii) FCC (Brasil) 0.16% (viii) PT. FCC Indonesia 0.66% (ix) FCC Taiwan 0.01% Total : 37.17% It is found from the above chart that the related party transaction of FCC in respect of purchase of raw materials during the year was 37.17%. It is also seen from the order of the Ld. CIT(A) that he had rejected the comparable, where the related party transaction was in excess of 25%. As the related party transaction in this case also exceeds 25%, it is directed that FCC should also be excluded from the set of comparable. 8.14 Setco Automotive Ltd.: The contention of the assessee is that this company has different product profile and there was abnormal event of acquisitions as reported....
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....tio of that decision cannot be imported to the facts of the present case as the assessee is engaged in altogether different activity. The assessee has not pointed out as to how the intangible as owned by Setco had any effect on their margin. The finding given by the ld. CIT(A) in respect of this comparable is as under: "ii) The other contention of the appellant relates to comparables owning intangibles. It is seen from the order of TPO in appellant's own case for A.Y. 2008-09 that Clutch Auto Limited was not considered as a comparable on account of being owner of many intangibles Patent & Trade Mark. But at the same time the TPO analyzed the intangibles owned by Setco Automotive Ltd. and stated that intangible assets owned by this company are not in the nature of those that could affect the margin by enabling the entity to earn the higher margins such as goodwill and technical knowhow. The intangibles having large volumes are computer software and product development. The appellant in the present case also has not demonstrated as to how these intangibles will effect the margins of this comparable. Hence, the selection of Setco Automotive Ltd. is confirmed and that of C....
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.... manufacturing activity was 10.36% which was compared with OP margin of 26.7% of the comparables selected by the TPO and accordingly an adjustment of Rs. 44,47,175/- was made to ITES segment. The Ld. CIT(A) rejected the objection of the assessee in respect of comparable used by the TPO and upheld the TP adjustment in this segment. 9.2 The Ld. A.R. submitted that the assessee company had opted for Mutual Agreement Procedure (MAP) in respect of TP adjustment pertaining to transactions with United Kingdom (UK) AE. The assessee had accepted the terms mutually agreed under MAP resolution in respect of transactions made with UK Tax Residents AEs and a copy of the relief under MAP with UK companies has been brought on record. As a result of the MAP resolution, the assessee company has filed revised Ground of Appeal withdrawing the grounds challenging the TP adjustment in respect of its transactions with AE of UK. The Ld. A.R. explained that the margin as per assessee's TP study was 10.36% whereas ALP as determined by TPO and upheld by Ld. CIT(A) was 26.7%. On the other hand the margin as agreed upon under MAP resolution was 18% only. The Ld. A.R. requested that the margin of 18% determ....
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.... in the factors influencing the price between UK and non UK transactions. The assessee has not brought on record any similarities of factors that influenced the price between UK and non-UK transactions. Therefore, we are of the considered opinion that the matter may be restored to the file of the TPO/AO for analysis of factors influencing the price between UK and non-UK AE transactions for ITES segment. If it is found that the factors influencing the price are similar between UK and non-UK transactions, the price adopted for UK transactions may also be adopted for non-UK transactions. In this regard we are guided by decision of the Ld. ITAT, Bangalore in the case of Dell International Services India (Pvt.) Ltd. Vs. DCIT (73 taxmann.com 24),wherein it was held that if after taking a FAR analysis of non-US transactions, it is found that factors influencing the price were similar between US and non-US AE transactions, same price fixed under MAP can be adopted for all the transactions. The ground is allowed for statistical purpose. 10. Ground No. 6: TP adjustment in management charge 10.1 This grounds pertains to TP adjustment of Rs. 145,54,002/- in respect of management charges.....
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....l expenditure. He strongly supported the order of the Ld. CIT(A). 12.3 We have carefully considered the facts of the case and the submissions made by the rival parties. It is found that the assessee company is not treating the jigs and fixtures as revenue expenditure in its books of accounts. The company had a policy of writing off of the expense over a period of two years since long term enduring benefit was derived from jigs and fixtures. Undoubtedly, the jigs and fixtures are not in the nature of repairs and maintenance, so as to claim it as a revenue expenditure. They are utilized in the manufacturing process and the assessee has admitted that long term enduring benefit of at least two years is derived from them. The facts of the case Ucal Machine Tools (P.) Ltd. (supra) relied upon by the assessee are found to be different. In that case, the issue involved was expenditure on tools such as screw drivers, spanners which are purchased along with the machineries and their replacement was claimed as revenue expenditure. In the present case, the assessee itself is not treating the expenditure in respect of jigs and fixtures as revenue expenditure, rather it is writing off the sam....